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decided: March 24, 1982.



Blackmun, J., delivered the opinion for a unanimous Court.

Author: Blackmun

[ 455 U.S. Page 722]

 JUSTICE BLACKMUN delivered the opinion of the Court.

We are presented here with a recurring problem: to what extent may a State impose taxes on contractors that conduct business with the Federal Government?



This case concerns the contractual relationships between three private entities and the United States. The three agreements involved are typical in most respects of management contracts devised by the Atomic Energy Commission

[ 455 U.S. Page 723]

     (AEC), now the Department of Energy (DOE).*fn1 Like many of the Government's contractual undertakings, DOE management contracts generally provide the private contractor with its costs plus a fixed fee. But in several ways DOE agreements are a unique species of contract, designed to facilitate long-term private management of Government-owned research and development facilities. As the parties to this case acknowledge, the complex and intricate contractual provisions make it virtually impossible to describe the contractual relationship in standard agency terms. See App. 196-197; Hiestand & Florsheim, The AEC Management Contract Concept, 29 Federal B. J. 67 (1969) (Hiestand & Florsheim). While subject to the general direction of the Government, the contractors are vested with substantial autonomy in their operations and procurement practices.*fn2

The first of the contractors, Sandia Corporation, was organized in 1949 as a subsidiary of Western Electric Company, Inc. Sandia manages the Government-owned Sandia Laboratories in Albuquerque, N. M., and engages exclusively in federally sponsored research. It receives no fee under its contract, and owns no property except for $1,000 in United States bonds that constitute its paid-in capital. But Sandia and Western Electric are guaranteed royalty-free, irrevocable licenses for any communications-related discoveries or inventions developed by most Sandia employees during the

[ 455 U.S. Page 724]

     course of the contract, App. 34-35, and the company receives complete reimbursements for salary outlays and other expenditures. Id., at 40-42.*fn3

The Zia Company, another of the contractors, is a subsidiary of Santa Fe Industries, Inc. Since 1946, Zia has performed a variety of management, maintenance, and related functions at the Government's Los Alamos Scientific Laboratory, for which it receives its costs as well as a fixed annual fee. While Zia owns property and performs private work, virtually none of its property is used in the performance of its contract with the Government, and all of its private activities are conducted away from Los Alamos by a separate work force.

The third contractor is Los Alamos Constructors, Inc. (LACI), since 1953 a subsidiary of Zia. LACI's operations are limited to construction and repair work at the Los Alamos facility. The company owns no tangible personal property and makes no purchases; it procures needed property and equipment through its parent, Zia. And like Zia, LACI receives its costs plus a fixed annual fee from the Government.

The management contracts between the Government and the three contractors have a number of significant features in common. As in most DOE atomic facility management agreements, the contracts provide that title to all tangible personal property purchased by the contractors passes directly from the vendor to the Government. App. 231a (Zia); id., at 34 (Sandia).*fn4 Similarly, the Government bears the

[ 455 U.S. Page 725]

     risk of loss for property procured by the contractors. Zia and LACI must submit an annual voucher of expenditures for Government approval. Id., at 20 (Zia); id., at 27 (LACI).*fn5 And the agreements give the Government control over the disposition of all property purchased under the contracts, as well as over each contractor's property management procedures. Disputes under the contracts are to be resolved by a DOE contracting official. Id., at 128-129 (Zia standard terms) and 157-158 (Sandia standard terms).

On the other hand, the contractors place orders with third-party suppliers in their own names, and identify themselves as the buyers. See id., at 36-37 (Sandia contract) and 120 (Zia standard terms). Indeed, the Government acknowledged during discovery that Sandia, Zia, and LACI "may be . . . 'independent [contractors],' rather than . . . '[servants]' for . . . given '[functions] under' the [contracts] (e. g., directing the details of day-to-day . . . operations and the hiring and direct supervision of employees)," id., at 197, and the Government does not claim that the contractors are federal instrumentalities. Id., at 201; see Department of Employment v. United States, 385 U.S. 355 (1966). Similarly, the United States disclaims responsibility for torts committed by the contractors' employees, and maintains that such employees have no claim against the United States for labor-related grievances. See 624 F.2d 111, 116-117, n. 6 (CA10 1980).

Finally, and most importantly, the contracts use a so-called "advanced funding" procedure to meet contractor costs. Advanced funding, an accounting device developed shortly after the conclusion of the Manhattan Project, is designed to provide "up-to-date meaningful records of costs and controls of property," as well as to "speed up reimbursement of

[ 455 U.S. Page 726]

     contractors." App. 204 (Fifth Semiannual Report of the Atomic Energy Commission (1949)). The procedure allows contractors to pay creditors and employees with drafts drawn on a special bank account in which United States Treasury funds are deposited.*fn6

To put the advanced funding mechanism in place, the United States, the contractor, and a bank establish a designated bank account, pursuant to a three-party contract. The Government dispatches a letter of credit to a Federal Reserve Bank in favor of the contractor, making Treasury funds available in the designated account. The contractor pays its expenses by drawing on the account, at which time the bank or the contractor executes a payment voucher in an amount sufficient to cover the draft. The voucher is forwarded to the Federal Reserve Bank. The United States owns the account balance. See id., at 19-20, 84-90a, 109-113. As a result of all this, only federal funds are expended when the contractor makes purchases. If the Government fails to provide funding, the contractor is excused from performance of the contract, and the Government is liable for all properly incurred claims.

Prior to July 1, 1977, the Government's contracts with Sandia, Zia, and LACI did not refer to the contractors as federal "agents." On that date -- some two years after the commencement of this litigation -- the agreements were modified to state that each contractor "acts as an agent [of the Government] . . . for certain purposes," including the disbursement of Government funds and the "purchase, lease, or other acquisition" of property. Id., at 50-51, 55-56, 59-60. This was designed to recognize what was described as the "long-standing agency status and authority" of the contractors. Id., at 50, 55, 59. Thus it was made clear that Sandia and

[ 455 U.S. Page 727]

     Zia were authorized to "pledge the credit of the United States," id., at 52 and 56, and the Government declared that it "considers all obligations properly incurred" in accordance with the contractual provisions to be Government obligations "from their inception." Id., at 52 (Sandia), 56 (Zia), and 60 (LACI). At the same time, however, the United States denied any intent "formally and directly [to] [designate] the contractors as agents," id., at 64, and each modification stated that it did not "create rights or obligations not otherwise provided for in the contract." Id., at 52, 57, 61.


New Mexico imposes a gross receipts tax and a compensating use tax on those doing business within the State. With limited exceptions, "[for] the privilege of engaging in business, an excise tax equal to four per cent [4%] of gross receipts is imposed on any person engaging in business in New Mexico." N. M. Stat. Ann. § 72-16A-4 (Supp. 1975).*fn7 In effect, the gross receipts tax operates as a tax on the sale of goods and services. The State also levies a compensating use tax, equivalent in amount to the gross receipts tax, "[for] the privilege of using property in New Mexico." § 72-16A-7. This is imposed on property acquired out-of-state in a "transaction that would have been subject to the gross receipts tax had it occurred within [New Mexico]." § 72-16A-7(A)(2).*fn8 Thus the compensating use tax functions

[ 455 U.S. Page 728]

     as an enforcement mechanism for the gross receipts tax by imposing a levy on the use of all property that has not already been taxed; the State collects the same percentage regardless of where the property is purchased. Neither tax, however, is imposed on the "receipts of the United States or any agency or instrumentality thereof," or on the "use of ...

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